3.4 Market structures

Perfect competition diagram in the short run

Perfect competition diagram in the long run

Perfect competition productive efficiency in short run

unlikely as not operating at bottom of AC curve

Perfect competition productive efficiency in long run

yes- firms cannot make a profit or loss in the long run, therefore must be operating at the bottom of the AC curve

Perfect competition allocative efficiency in short run

yes- as P=AR, AR=MR and MR=MC, P=MC, which is the condition for allocative efficiency

Perfect competition allocative efficiency in long run

yes- as P=AR, AR=MR and MR=MC, P=MC, which is the condition for allocative efficiency

Perfect competition dynamic efficiency in short run

no- profits are unlikely to be high enough to invest

and as firms have perfect information firms are not incentivised to innovate as other firms will copy them

Perfect competition dynamic efficiency in long run

no- firms can only make normal profit, so do not have enough to invest

and as firms have perfect information firms are not incentivised to innovate as other firms will copy them

Short run Monopolistic competition

Long run Monopolistic competition

Example industries

• restaurants

• clothing stores

• hairdresssers

• nail salons

• parcel delivery

Chain of analysis from short run to long run in monopolistic competition

• AR and MR are steep in the short run as demand is more price inelastic for products

• the existence of SNP incentivises more firms to enter the market, which is possible due to low barriers to entry

• as firms enter the market, individual firms’ market share decreases

• revenue curves/ demand curves shift in and left

• there are more substitutes in the market, so demand becomes more price elastic

• revenue curves become more shallow

• revenue curves shift in until profits are normal, at which point firms stop entering the market

• here AR=AC and this is the point at which firms are making normal profit

monopolistic competition productive efficiency in the short run

no as there is some differentiation between products

monopolistic competition productive efficiency in the long run

no- not perfect competition so firms are not forces to be productively efficient

monopolistic competition allocative efficiency in the short run

no as firms will set prices above MC 

monopolistic competition allocative efficiency in the long run

no

monopolistic competition dynamic efficiency in the short run

small amount to differentiate products

monopolistic competition dynamic efficiency in the long run

no as there are no SNP

oligopoly kinked demand curve

How might firms in an oligopoly engage in non price competition

• loyalty cards

• branding

• packaging

• advertising

• warranties

Why are firms interdependant

they have relatively few competitors, so study the pricing of them carefully

What is the Nash equilibrium

result from both firms choosing their dominant stratergy

What would need to happen for both firms to stay at the raise price equilibrium

collusion

What might make collusion in a market more likely

• fewer firms

• homogenous products

• similar cost structures

• demand is price inelastic

• high barriers to entry

why can a competitive oligopoly be beneficial for consumers

• price stability

• lower prices

• dynamic efficiency

• non price competition

why can a collusive oligopoly be bad for consumers

• higher prices

• limited dynamic efficiency

• can restrict supply

Monopoly diagram

monopoly productive efficiency

unlikely to produce at the bottom of the AC curve as they can charge higher prices which consumers are forced to pay

monopoly allocative effiiciency

no as the point at which AR=MC is below the profit maximising point, so the good will be underconsumed

monopoly dyanmic efficiency

potentially due to presence of SNP, however unlikely due to lack of pressure from competition, depends on level of contestability

Natural Monopoly diagram

Why is LRAC downward sloping for a monopoly

economics of scale due to very high fixed costs and low marginal costs, as natural monopolies are often utilities

What is third degree price discrimination

when a seller charges different prices to different segments of customers for the same product

3 diagrams to show how third degree price discrimination is used in a market segment with price inelastic demand, price elastic demand and the overall marke

benefits to firms of price discrimination

• increase revenue, might allow some firms to stay in business when they otherwise would have made a loss

benefits to consumers of price discrimination

• spreads out demand eg for trains, reducing congestion

• increases revenue for firms leading to SNP potential for dynamic efficiency and innovations

• higher earners essentially subsidise lower earners

drawback to firms of price discrimination

• administrative costs in separating the markets

drawback to consumers of price discrimination

• some consumers will end up paying higher prices, which is likely to be allocatively inefficient

• decline in consumer surplus

• those paying lower prices may not be the poorest

• profits could be used to finance predatory pricing